CNBC Disruptor 50

More builders turning to cash-for-homes company Opendoor to spur housing sales

Key Points
  • Opendoor, which already has a deal with Lennar, recently signed on homebuilders Century Communities and Gehan Homes.
  • Opendoor gives cash offers and flexible closing dates for existing homes, letting homebuyers avoid some of the uncertainty and hassle involved in moving.
  • Opendoor has completed more than 60,000 transactions and focuses on buying homes in a price range of $100,000 to $500,000.
Source: Opendoor

Homeowners dreaming of moving up from their starter home to a newly built, larger home are being offered more ways to make the move as quickly and effortless as possible.

A growing number of homebuilders have partnered with internet-based real estate companies, including Opendoor, to cut down on the hassle and uncertainty homebuyers often face when moving from one house to another. On Tuesday, Opendoor announced two more homebuilding companies with which it has signed partnerships: Texas-based Gehan Homes and Colorado-based Century Communities, which operate in 12 states across the Southeast, Texas, Mountain and Western U.S.

One of the key hurdles to buying a new home can be selling an existing one, said Nate Harbacek, head of corporate and business development at Opendoor. To combat this, the company gives homeowners a cash offer for their house and a flexible closing date so customers don't have to show their home. It also lowers the risk of a buyer backing out at the last minute. What's more, the flexible closing date circumvents the need for temporary housing, storage and carrying two mortgages at the same time.

"I think that there's an embedded procrastination on the part of many people who have already gotten to the point where they've outgrown the walls of their home," said Stuart Miller, the executive chairman of Lennar, one of the country's biggest homebuilders, which is an Opendoor venture investor and partnered with it to spur home sales in 2018. "Just the anxiety around having to engage in the selling process and bringing multiple prospects through their home — it's a daunting task."

Opendoor's housing sweet spot

Opendoor's appraisal process is heavily automated, allowing it to give cash offers within 24 hours, Harbacek said. That offer is then good for 60 days, or nine months if the deal is made with one of its homebuilder partners. The company focuses on buying homes in a price range of $100,000 to $500,000. It offers cash to the seller, which the company has raised through a combination of equity and debt. The average fee charged by Opendoor is 7.5%, Harbacek said. Most sales through Opendoor are direct and don't involve a Realtor.

The median price of a newly built home dropped in September to $299,400, 8.8% lower compared with September 2018, according to the U.S. Census, and was the lowest since February 2016. Half of the homes that sold in September were priced below $300,000. Sales of newly built homes dropped slightly compared with August but were 15.5% higher annually, and stocks of the homebuilding companies have risen along with a record stock market this year.

Home builder sentiment at highest level since February 2018
Home builder sentiment at highest level since February 2018

For homebuilders, the ability to steer a potential buyer to Opendoor gives them what they are looking for: a more solid sale commitment, as homebuilders are more hesitant to sell to a buyer carrying an existing mortgage.

Miller said the ultimate efficiency would be for buyers to close on new homes the day they are completed. Working with Opendoor, and other shifts such as the growing trend of builders selling new developments to single-family rental companies, allows the builders to sit on completed but empty houses for shorter amounts of time.

Though Lennar doesn't have data that isolates the impact of its partnership with Opendoor, Miller believes that it is working. "It's been impactful. We think in terms of efficiency but also in terms of happiness around the transaction," Miller said.

Online real estate competition increasing

Partnering with homebuilders is just one of the growth strategies for Opendoor, a company that tries to remove the friction involved in selling a home. The company, which was on the 2019 CNBC Disruptor 50 list, has completed more than 60,000 transactions at an annualized run rate of $5 billion in total housing market value — $1.5 billion of that total housing value is from homebuilders.

Though Opendoor does purchase and resell the homes, Harbacek said it is a misconception to view the company as a home flipper. The company does have an app, which it calls Sherlock, that contractors in a given geographic area can use to see any work that Opendoor needs done on a house. But the company is not trying to make money by gutting and remodeling the homes it buys.

"Most Americans can't carry two mortgages, so they were constantly in this situation where to buy their next house or move, they'd have to sell their existing house, move in with their parents, move into an apartment or take less than the value of their house," Harbacek said. "So the fundamental premise of the business is, we will give you an accurate valuation of your home, and we will charge you a fair fee that is commiserable with what traditional transaction costs in the market are."

Miller and Harbacek said they believe the ease of selling provided by companies like Opendoor not only makes the process faster but also creates more demand for real estate transactions. Opendoor competitors, like Zillow and Redfin, are also expanding real estate services.

"It's low-margin, high-volume at scale, and you need to be all in to do it. And when you look at Zillow's traditional business model, it was advertising and kind of agent-focused," Harbacek said. "I think they've had to make a material pivot to try to enter this business, and they're in the process of going through that … we have a five-and-a-half-year head start in doing this."

As Opendoor grows, the company is trying to integrate more steps of the homebuying process into its offerings. It recently acquired a title company called OS National and has launched a new service that offers home loans. Zillow and Redfin have made similar moves.